Learn About Financial Mistakes to Avoid... Do You Need a Visit to the Finance Doctor?
I have made a lot of financial mistakes and been witness to even more over the years. I’m not afraid to share my mistakes with you so that hopefully you will learn from them, and do better for yourself. I know learning from someone else’s mistakes works because my own kids are much better with money than I was at their age. (See my post on the power of giving your kids an Allowance as one example.)
Watch for posts about financial wellness in our Smart Finance for Working Moms Category, also known as the Finance Doctor.
To give you an idea of what we will talk about, here are 3 of the things I did wrong or was the unwitting recipient of:
1) Don't day trade your 401K!
In 2002, the value of my husband’s 401K was around $80,000. He put in 15% pre-tax and got a match from his company of around 3%. Two years later, I happened to see his statement, and he had around $85,000 in his 401K. The amount he put in alone should have had him over $100,000 by that point. So, where was the other $15,000? He kept moving the funds that his 401K was invested in. Not only did he not get good returns, he actually lost money.
By 2011, when we were trying to finalize our divorce, his 401K wasn’t much higher than 9 years before, despite continuing to contribute. If he had put the money in a few indexed funds and just let it sit, even with the fluctuations in the market, he would have had over $200,000 in his 401K and over $300,000 when he retired. If he had put just the amount matched by his company and invested the rest in a cash value life insurance, he would have had at least the same return with the benefit of half of it tax-free plus a few hundred thousand more in death benefit.
2) Get cash value life insurance young (and don't let it lapse)
Like just about everything insurance related, it gets more expensive every year. I got a great Whole Life Policy when I was in my 20’s. When I moved across country, I had some financial hiccups while looking for a better job. The $24 a month for $100,000 in life insurance seemed unnecessary. So, I let it lapse. Had I kept paying that $24 a month, I would have over $200,000 in coverage with thousands of dollars in cash value available to me.
3) Borrow against your life insurance policy, don't withdraw it.
About 10+ years after I let my life insurance policy lapse, my husband took a withdrawal out of his life insurance to pay some unexpected bills. Not long after that, he let his policy lapse. If he had taken a loan against the cash value instead of a withdrawal he would have saved a lot of money and still have a policy he can never get again.
Why borrow not withdraw the cash value of your life insurance policy?
When you borrow against the cash value in your policy (if you were smart enough to get such a policy instead of a term policy), the money you take out is not taxed. Withdrawals are taxed for any amount over what your premiums paid in added up.
The amount of money in the cash value would have still been growing. When you borrow against the cash value of your life insurance, you are essentially lending the money to yourself while the cash value acts as collateral to guarantee the loan if you die without paying yourself back. So, you are earning interest on the cash value you borrowed, while paying some interest on the amount you borrowed (usually 0.25% – 2% more than the interest you are earning). If you die without paying back the loan, that amount will come out of your death benefit. What the heck does all that mean?
Let’s say you have a $100,000 life insurance policy (like the one I cancelled) with cash value of $11,000. That means your death benefit is $111,000 (the value of the death benefit plus the cash value). In the simplified version, let’s say you borrowed $10,000 and didn’t repay that before you passed on. The $10,000 will be taken out of the death benefit leaving your loved ones $101,000 to help them when you are gone. The exact numbers of the benefit will be higher based on the length of time you have the policy and the interest earned on the cash value.
For more information check our Finance Doctor Posts for Smart Finance for Working Moms or check out Wealth Building , Debt Reduction, Building a Legacy.
What are some finance lessons you learned from your own mistakes, or hopefully from someone else’s mistakes?